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Asset allocation: Brewin Dolphin looks to sell down US and UK equities

Brewin Dolphin is looking at selling down its US and UK equity exposure as weak earnings growth and a stronger dollar and pound make it attractive to take income in the sectors.

Brewin is currently overweight in both UK and US equities but head of research Guy Foster says noises coming from the respective governments on rising inflation will force a sale of holdings.

He says: “We will be looking at maybe reducing both US and UK as it stands. The question is when will the rate cycle turn and whether the rhetoric about rising inflation is a modest headwind for markets in general. Under those circumstances we would be looking to start taking some profits as we have enjoyed currency appreciation but want the income before it starts impacting translated earnings.

“It is the same sort of story for the UK, except we have already had the currency strength here and that has weighed on earnings. If it continues, we will be taking advantage of that strength and again getting out before it weighs earnings too heavily.”

Brewin’s UK exposure is built through holdings in the £2.9bn Threadneedle UK Equity Income fund and the £1.25bn Investec UK Special Situations fund, alongside some passive Vanguard exposure.

The Threadneedle portfolio is co-managed by Leigh Harrison and Richard Colwell and has returned 126 per cent over five years compared with an IMA UK Equity sector average of 105 per cent.

Investec’s Special Situations fund is managed by Alastair Mundy. The investment philosophy entails purchasing shares in strategically placed companies when sentiment towards them is at or near its worst before selling them when profits and long-term prospects improve.

US exposure consists of the £2.2bn JP Morgan US Equity Income fund, alongside further Vanguard US exposure. JPM’s US Equity fund is managed by Clare Hart and has returned 127.5 per cent over the last five years compared with an IMA North America sector average of 113.7 per cent.

Foster is confident in the continuing growth prospects in Japan and the increasing chance of higher wage growth in the area.

“We remain positive on the story,” he says. “We are unhedged at the moment and we do see tightening labour markets which should push through into higher wages. There is strong optimism from small businesses and so the pressure on real wages is unlikely to persist.

“There is a pretty reasonable chance of further stimulus as Japanese exports remain structurally uncompetitive at this rate. Long-term inflation expectations remain below Bank of Japan target and have set up an environment where you should see better wage grades, even though BOJ has got every excuse to provide further stimulus.”

An overweight position in Japan is held through Andrew Rose’s £1.26bn Schroder Tokyo fund.

The portfolio is top-quartile over five years and has returned 47.93 per cent in that time compared with an IMA Japan sector average of 40.35 per cent.

Emerging markets are a sector Brewin is steering clear of, at least within the balanced portfolio in which there are currently no emerging market holdings.

Foster says: “We are expecting a few more months of outperformance by emerging markets which will then settle back into underperformance. For more tactically minded mandates we would look at things like India but in general we take a longer-term view so we are just ignoring it and maintaining a position of nil.”

Five portfolios

European funds are also popular and the firm has recently reduced its holdings in the £931m Old Mutual Smaller Companies fund to build up its position in the £2.28bn Threadneedle European Select fund.

Brewin currently runs a total of five portfolios. Across those, Foster says the most interesting fund they hold is the £30m F&C UK Equity Linked Gilt fund.

The fund looks to combine UK equity exposure with investment in UK index-linked government securities and cash. It invests predominantly in gilts with terms of 15 years and over, with approximately 25 per cent in cash. All equity exposure is in FTSE 100 exchange traded futures.

Foster says: “This is like a UK FTSE 100 tracker large cap exposure but achieved with futures so instead of holding collateral for futures, 75 per cent goes into gilts of 15 year maturity and more. We like it because it gives us very efficient allocation of capital for low cost as it is a tracker that gives us 175 per cent exposure and it takes care of gilt exposure.”

The firm is underweight in cash,  with a 2.5 per cent holding, and Foster says it is looking at opportunities to reduce cash to nil.

“We have got 2.5 per cent cash at the moment. It depends what happens and we are not holding that cash as a strategic position.

“If it is practical to go to zero we will go to zero.”

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About Brewin Dolphin

Foster

Guy Foster, head of portfolio strategy

Founded in 1762 Brewin Dolphin has both a discretionary fund management and financial planning arms with 39 offices throughout the UK and Channel Islands. Brewin currently has some £28bn assets under management. The company is listed on the London Stock Exchange. Alongside its investment management arm Brewin has just under 500 investment managers and financial planners in the UK. Brewin also has a direct-to-consumer platform, Stocktrade. All of its model portfolios carry an annual management charge on 0.36 per cent across the five portfolios available. 

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